Saturday, May 16, 2015

I’ve developed two downtown properties here in Rapid City,
deploying about 2 million in capital. My experience is primarily in the
downtown and has always been focused on rehabilitating and re-purposing older
structures. This is quite a bit different than commercial and residential
development and new construction. The issues I find are not so much with the
permitting “process” but rather what happens when you pull the permit and what
the average, local investor (not an “insider” club member) goes through trying
to meet code requirements.

The first project we undertook starting in 2007 was 727 Main
St, a mixed use residential property with six apartments and 2 commercial
retail spaces one of which housed The Corn Exchange, my wife’s restaurant. We
were able to successfully develop the property, double residential and
commercial rents by rehabilitating efficiently. We installed two quality,
successful tenants; Kathmandu Bistro and Pita Pit before selling the building
in 2014 at good gain, leaving the new owners with a 8% or 9% cap rate and good
cash flows to justify the price. It was a text book example of doing it right. I
don’t think can be repeated in the current environment (which is why we are
allocating the proceeds back to the Philadelphia market.) Recently we began the
second phase of our development of Aby’s Mill and things went quite differently
on that project. After having previously fit out that space for The Daily Grind
(Bully Blends) Coffee shop then Barefoot Dance Studio with a minimum of red
tape and at a reasonable cost we didn’t anticipate the issues we encountered. I’ll
try to give you some specific concrete examples:

Example 1: Pulling permits to expand Barefoot Dance and Fit
out the long vacant Mill Tower for Revival at Aby’s Mill triggered a parking
requirement calling for an absurd amount of spaces, severely limited the “uses”
and consequently who I could rent to and capping potential rental revenues,
severely limiting the economic viability of investing in the aging structure. At
this point, due to this requirement a full 60% of the 22,000 square feet under
roof is limited to a “cold storage” use which is basically a storage unit,
market price 2.50 per foot modified gross. As written that requirement, driven
by the boundaries of the CBD (central business district) is one of those “all
or nothing” absurdities that seem so common in bureaucracies. The parking
requirement—again, one size fits all is ok for a Mall or office building
complete but not a repurposed downtown property. The code along with the
antiquated boundaries of the CBT coupled with local disease I call “parking
hysteria” pretty much kills all development of properties East of 5th
street or limits it to stupid people, people with nothing else to do with their
money but build empty parking lots or people who like getting negative returns
on capital. Because it was Aby’s and because most of the people on the boards
realize this is a major problem we were able to carve out exceptions to the
parking requirements (at considerable cost) but still had to comply with a
number of requirements that only add cost and provide no benefit such as
detailed planting requirements which have a point system for different plants
even though all the parking is in an interior courtyard completely out of
site.

Getting the exceptions required going through an expensive
and somewhat tedious approval for a Planned Community Development (PCD) at the
end of which, every department in the city gets a chance to pile on with their
own particular requirements while time drags and costs go up. The design
submittal process for the PCD and the design cost for the parking lot generated
close to 30,000 in professional fees just to get approval to pull the permits
and triggered a fire code requirement
(since mitigated and delayed but still in place) for nearly 150,000 in fire
alarms and sprinklers. This on a building that has stood vacant for 20 years
and is listed as “in peril” by the Histos.

To put it in perspective the building next door (Freed’s
furniture) inside the CBD has a requirement of ZERO parking spaces. You’re either in the business district—no parking
requirement, or out of it—go broke providing parking. There are numerous
properties on the edges of the current CBD that will remain under used because
of this problem. Had I known what I know now Aby’s would not be developed, at
least not by me and I won’t make that mistake again.

Example 2: Pulling permits on 727 Main Street sometime in
2010 triggered a sprinkler system and alarm system requirement for about half
the building which I managed to get a two year moratorium on doing. If I had
not gotten the moratorium that development would have stopped dead in its
tracks because the sprinklers and alarms were more than the renovations by a
factor of two. When the moratorium was up and we simultaneously pulled permits
to build out Pita Pit the requirement kicked back in and then went way, way up.
We had to install fire sprinkler systems and
a station to station alarm system in every square foot of the building including 6 individual apartments, both
retail spaces and both basements at a total cost of nearly 50,000 dollars,
more than 10% of the cost of the building. Doing this kind of work in old
buildings is not the norm. Generally rehabilitation codes allow for enhanced
alarm systems and other fire detection methods, all very effective.
Additionally, without a lot of engineering to adapt existing water supply and
cooperation from the fire marshal we would have had to spend an additional
15-20K 15,000 to open the street to bring in larger service just to supply the
sprinklers. The building already adequate water service, hard wired smoke and
CO detectors in all the common areas, upgraded individual electric service and
gas meters to each apartment, and Fire suppression under the hood systems in
the restaurant along with new electric service and HVAC and alarms in both retail spaces. Most downtown
building owners I know would rather patch things up and limp along, anything to
avoid pulling a building permit and dealing with the tsunami that follows.

Again I don’t know if this fits exactly what you are asking
but since you asked, I’ll vent. I want to add that the people in the process
for the most part try hard to work with you. They are tasked with enforcing bad
building code and zoning practices that have been enacted and they do the best
they can. Everybody, including Historical review has always worked hard to help
me get these projects done but that’s not enough. It’s bad policy that hinders
development and drive capital away. I probably will probably not do any more
development here until they fix the stuff I’ve outlined below. Since I don’t
like to whine without proposing solutions here are mine for what they’re worth:

1.Expand the central business district now.
Why does anyone have to think about this. This is a no brainer. If you have to
think about this for more a few minutes then the word “think” shouldn’t be used
in the same breath as “you”. Parking requirements, driven by the all or nothing
zoning and code requirements are the primary factor holding back further development
downtown. Timing is everything, this opportunity won’t last forever. Do it NOW.
Don’t take my word, take a ride down and have a look at Dakota Banks empty parking lot and go in and ask Bank
President Rick Rylance what he really thinks. Bring a lunch.

2.Create a sensible, graduated building code that understands
“repair and replace” “renovate” and “rehab” to help develop old and difficult
to re-purpose properties.

3.Reform the fire code for rehab and
renovate and replace and repair applications.

4.Eliminate redundancy in the Historic
Preservation process as appears to have been done. (Thank you whoever did that)

5.Allow owners to act as their own General
Contractors. This, again is a fundamental right of owners of property in my
opinion. Where this new rule came from is beyond me but it has to go.

About Me

I'm a businessman and writer living in the Black Hills of South Dakota. I've written articles and commentary for 25+ years. I was a member of the Chicago Board Options Exchange and the founder of a futures brokerage firm for a total of twenty years and I own commercial real estate in western South Dakota. I served three years ('66-'69) in the U.S. Marine Corps, including a 13-month tour of duty in Vietnam as a radioman. My wife and I have two grown daughters. We make our home in Rapid City, South Dakota